Posts tagged passive income

If you have never read the Cashflow Quadrant by Robert Kiyosaki, I highly recommend reading it as soon as possible. In this book he explains that everybody falls into at least one of four quadrants. Either you're an Employee, Self employed, a "B" type Business owner or an Investor.

In the next couple of paragraphs I will attempt to explain what each of these quadrants are all about, however; If you want all the details then I would recommend reading the book for yourself.

Years ago when I was starting to learn business principles, this was one of the first business books I read. After I read the book I realized (based on the things that I wanted out of life) that I was earning income in the wrong quadrant. You see, it's not to say that any quadrant is better than the next, they're just different and depending on what you want out of life you may also realize that you're making money in the wrong quadrant too. That's up to you to decide but for me, I wanted my Time back.

The quadrant is broken into the left side, the right side, the top and the bottom.

The left side (the Employees and self employed people) trade their most precious commodity which is "TIME" for income. The employee will go to work every day and exchange their hours for dollars. The Self Employed person will also go to work every day and exchange their hours for dollars but instead of having a job, they own a job. In fact, quite often the "S" stands for stress because these people are stressed out. Why? Because they are responsible for the success of their "S" type business as well as the expenses that come with it. They have to pay for the supplies, the buildings, the utilities, the trucks, the gas etc.. They are also the last ones to get paid since they owe their employees a paycheck first (whether or not they have a good week). An example of people that fall into the "S" quadrant are: Doctors, Lawyers, landscapers, electricians, plumbers, carpenters, etc. I could go on all day and list off all the Self Employed businesses where the owner still has to trade their time for money but you get the idea. It is said that 95% of people are in either of these two quadrants generating 5% of the money. Can you think of anyone that you know that is in the "E" and "S" quadrant?

Did I mention that the left side looses their Time?

I would venture to say that when an employee gets fed up with their situation they try to move from the "E" quadrant to the "S" thinking that they will free up their Time however; what ultimately happens is that instead of having a job they own a job. What they really meant to do is switch sides of the quadrant which brings us to the Right side.

The Right side consists of 5% of the people who generate 95% of the money. The "B" type business owners are the people who invest their time and money into "Systems" that generate passive Income that frees up their time. It is sometimes said that these people can "make money while they sleep" because they have a system that generates passive income. For more information on passive income read this article. Now lets get back to the "Systems" idea that is present in the "B" quadrant. Franchises are a part of the "B" quadrant but not all are equal. In a successful Franchise system the owner is hardly ever there working but yet the system operates successfully without them. One such example would be owning a McDonalds Franchise. Do you ever see the owner of your local McDonalds restaurant flipping burgers? No, they have people in charge of all aspects of their Business. Another example of a "B" type Business owner would be a person who owns a successful Network Marketing business. Why? Because people on your team help to operate a system that produces passive income. Again you can read this article.

Let me sidestep for a minute and try to illustrate an example for you of the mindset of the "E" and "S" versus the "B". Suppose that all the wells that supplied a village dried up. So the Mayor of that village called together a town meeting to discuss how to get water from a fresh water source that was 2 miles away and put it back into the well that supplied the village. For every gallon of water that was put into the well, that person made a dollar. Now here's the catch. It doesn't matter how the water gets there, just as long as it does.

Since everyone knows they will get paid a certain amount of money for every gallon of water they supply to the well, they start carrying buckets. They trade their Time for dollars doing manual labor. This is the example of the "E" quadrant.

Well, the Employee decides he wants to make more money and moves from the "E" to the "S" quadrant. He employs people to help carry buckets and maybe slaps a sticker on his office door that says senior bucket carrier. They might even buy bigger and better buckets for their employees to carry. What they don't realize though is that they have to manage all the aspects of their business themselves and instead of having a job, they own a job.

For this reason the left side of the quadrant is often called the bucket carrying side. Both the "E" and the "S" carry buckets everyday!

The illustration below is an example of what the people in the "B" quadrant would do. They would read books, purchase information, maybe attend seminars and get mentored from people who know how to build pipelines. While they are researching and learning they start to build pipelines that connect from the fresh water source to the village well. By the way, this doesn't happen overnight. Let me ask you a question. When your pipeline is only half way finished, how much water is flowing to the village? None right; so how much money are you making? None. Often times while the "B" type business owner is building their pipeline they are getting laughed at because they aren't making any money. They are still building their pipeline but once that pipeline is connecting the well to the fresh water supply, the "B" type business owner now has a system that does the work for them (the pipeline is the system). Now all they have to do is maintain the pipes here and there and every time someone turns on their faucet to get water, The "B" is generating Passive Income. Now they have time to do what they want and even the know-how that if they choose, can build more pipelines. So what does this mean?

The "B" type business owner, thru a system, has both TIME and MONEY!

Here are some examples of "B" type business systems that the owners would have TIME & MONEY!

A successful franchise owner – The franchise has a system that operates without the owner being there. One of the problems however is that they often times cost more than the average person has ($100,000 – $1,000,000) and for the real successful systems like a McDonalds franchise, there are often waiting lists.

A self employed business owner who has subtracted themselves from the equation – Many times this takes years to do but it can be done! One of the potential problems that I see with training someone that is qualified to replace you in your business is that often times they start their own business doing exactly what you are doing and become your competition. Be careful!

Network Marketing – Often times when a person enters into network marketing there is already a system in place. Just remember however that not all network marketing opportunities and network marketing systems are equal. A person who has a successful network marketing business may have thousands of people in their down line. This may take years to accomplish but one of the benefits is that you can get involved for a minimal fee. Unlike a Franchise.

Internet marketing – A person who has learned how to develop a successful Internet marketing business has learned how to "make money while they sleep". It takes time to set up and learn the ropes but many people have made millions with the internet. This person may have hundreds of pages online collecting e-mail lists, drawing people to their business center and sales pages. This is automated. You could be sitting on the beach and still selling a product on the Internet. This is the model that I personally like best!

Now lets move on to the "I" or the Investor quadrant. This type of income is called portfolio income (when money generates money). This is the quadrant that is usually entered when people have enough Passive Income (the type of income that is generated in the "B" quadrant) to filter into different types of investments. It is said that if a person doesn't have $250,000 that they could lose in an instant and it wouldn't even make a dent in their finances, then they're really not the type of investor that is on the right side of the quadrant.

By now you should realize that the people on the left side of the quadrant (the "E" and "S" ) make up 95% of the people that you and I know but only generate 5% of the total dollars. That's like having 20 people fight over 1 dollar (The Rat Race). They trade their time for income.

The people on the right side of the quadrant (the "B" and "I" ) make up 5% of the people but generate 95% of the total dollars. That's like having 1 person fight over 20 dollars. Of course they're not fighting. They invest their time and money into systems that generate passive and portfolio income.

Robert Kiyosaki explains that what you need to move from the left side of the quadrant to the right side is INFORMATION from the correct source. Now let me ask you a question.

Here's a little equation I want to share with you. The equation says that you are wealthy when your passive income is greater than your expenses.

What does this mean you might ask. Well let me explain. Income in general can be lumped into three different categories. Earned (active) income, Passive income & Portfolio income

1. Earned (active) income is defined as when you exchange your hours for dollars in the form of a job. A person who works for a salary or even a self employed business owner are both considered part of the Earned income category. The problem with this income category is that you lose your most precious commodity: Your Time! It is said that 95% of people are in the earned income category. It's not that people in this category want to trade hours for dollars, they just don't know of any other way of generating income. Think about it for a minute. Is there anyone you know that doesn't have to trade hours for dollars to make a living? Why is this? I would say that most of us are taught to trade hours for dollars all of our lives. Isn't that what we learn all throughout school. Even college is designed to get us a Job that trades hours for dollars.

2. Passive income is an income received on a regular basis with little effort required to maintain it. – Income generated this way is usually generated through business systems and royalties. For example: suppose you own the patent for the 5 gallon bucket. That would mean that every time someone purchased a 5 gallon bucket from the store, a percentage of that income would go to you. Another example would be purchasing a Business system or a franchise. Lets use McDonalds as an example. There is a system that McDonalds follows and the franchise owner is not spending their own time flipping burgers but yet they have a system that generates income without them. The problem with buying business systems is that they're very expensive and the average person won't be able to get involved.

There are other Business structures that when you build them you start generating Passive Income. At first it is in the earned income category because you trading your hours for dollars but if you build it right, over time (let say a couple of years or so) you can start subtracting yourself from the equation and generate passive income. I like these structures the best because it's a level playing field for people to participate. In other words,

You don't need a million dollars buy a franchise system,

You don't need to be some extraordinary musician who can start generating royalties from their record sales,

You don't need to be a Top selling Author who can receive residuals for their work, and so on…

I will focus on two:

Network Marketing: Why network marketing you might ask? Well simply this… If you build a big enough team, you generate residual income on your down line. Network Marketing systems operate on this principle; you help someone generate $100,000 and you will make a percentage of that income, paid to you by the company. However, if you help enough people make money then you develop a passive income. It's a win, win principle. Franchises like McDonalds and countless others operate on the same idea. Every time a McDonalds in your area sells a hamburger, they kick back a few pennies to the main corporation. With over 30,000 McDonalds franchises around the world giving "kickbacks" to the corporation, you can see how the corporation develops a passive income. This is just one example.

Internet Marketing: I actually like this one the best because when you build your marketing business on the internet what are you doing? Your selling products and information. So why not offer your network marketing opportunity to your prospects as well. I guess what I'm trying to say is that if you build a Internet business, you can offer whatever products you want including your network marketing opportunity. But if you just build a network marketing business than that's all you got.

3. Portfolio income – Is when money generates money. Interest, stocks, bonds and dividends are all part of this category. Now I've heard business coaches say that this category is the category that you enter with your passive income. In other words, the people that have figured out how to develop business systems that generate passive income throw their left over passive income into this category. I've also heard that if you don't have $250,000 that you could lose at any moment and it wouldn't hurt you, than your really not playing around in this category.

Originally I wrote that your wealthy when your passive income is greater than your expenses. and here's the equation again:

So what does this mean? Well for the short answer this ultimately means that you have TIME. Yes, In my opinion wealth is measured by how much time you can free up.

How do we do this? We can learn to generate passive income that is greater than our expenses.

How much passive income do you need to be wealthy? The answer to that lies in how much your expenses are. If you only need $3,000 to pay your expenses than you can generate wealth faster than the person who needs $15,000 a month to pay their expense. Remember there are people that make $150,000 a year who are broke. Why? Because they use up all their time, to earn the income they need, to pay for their lifestyle.

Wealth is measured by how much free time you have!

So now the question that needs to be asked is this. How does the average person start generating passive income with the internet? I would start by doing this…